Today Sappi Limited is making publicly available the following information: USE OF TERMS AND CONVENTIONS

Transcription

1 March 10, 2015 Today Sappi Limited is making publicly available the following information: USE OF TERMS AND CONVENTIONS Unless otherwise specified or the context requires otherwise in this document: References to Sappi, Sappi Group, Sappi group, Group, we, us and our are to Sappi Limited together with its subsidiaries; References to the Refinancing are to the issuance of certain debt securities and the use of proceeds therefrom together with drawings under the Amended and Restated Revolving Credit Facility and cash on hand to redeem 250 million in aggregate principal amount of our 2018 Notes and US$300 million in aggregate principal amount of our 2019 Notes; References to the 2011 Refinancing are to the refinancing that we implemented in April 2011 which was comprised of the following transactions: (a) the issuance of the 2018 Notes and 2021 Notes, (b) the redemption of the remaining US$350 million of our US$500 million 6.75% unsecured guaranteed notes due 2012, (c) the repayment of 200 million of the outstanding borrowings under a 400 million term loan facility and (d) the increase of our revolving credit facility from 209 million to 350 million and extension of maturity from 2012 to 2016; References to the 2012 Refinancing are to the refinancing that we implemented in July 2012 which was comprised of the following transactions: (a) the issuance of the 2017 Notes and 2019 Notes, (b) the redemption of US$700 million equivalent in aggregate principal amount of our US$300 million 12.00% senior secured notes due 2014 and our 350 million 11.75% senior secured notes due 2014 and (c) entry into the OeKB Term Loan Facility; References to the 2017 Notes are to our US$400 million 7.75% senior secured notes due 2017, issued in connection with the 2012 Refinancing; References to the 2018 Notes are to our 250 million 6.625% senior secured notes due 2018, issued in connection with the 2011 Refinancing; References to the 2019 Notes are to our US$300 million 8.375% senior secured notes due 2019, issued in connection with the 2012 Refinancing; References to the 2021 Notes are to our US$350 million 6.625% senior secured notes due 2021, issued in connection with the 2011 Refinancing; References to the 2032 Notes are to our US$250 million 7.50% unsecured guaranteed notes due 2032; References to the Existing Revolving Credit Facility, Amended and Restated Revolving Credit Facility, and Intercreditor Agreement are to the facilities and agreement described in the section entitled Description of Other Financing Arrangements included elsewhere herein; References to the OeKB Term Loan Facility are to the 136 million term loan facility entered into with Oesterreichische Kontrollbank Aktiengesellschaft ( OeKB ) in connection with the 2012 Refinancing; References to B-BBEE are to Broad-Based Black Economic Empowerment, or Black Economic Empowerment, which arises as a result of the following South African legislation: the Employment Equity Act (No. 55 of 1998); the Skills Development Act (No. 97 of 1998); the Preferential Procurement Policy Framework Act (No. 5 of 2000); and the Broad Based Black Economic Empowerment Act (No. 53 of 2003); References to IFRS are to the International Financial Reporting Standards, as issued by the International Accounting Standards Board ( IASB ), when used in relation to the Group financial statements of Sappi Limited, or to the International Financial Reporting Standards, as issued by the IASB and as adopted by the 1

2 European Union, when used in relation to the consolidated financial statements of Sappi Papier Holding GmbH; References to southern Africa are to the Republic of South Africa, the Kingdom of Swaziland, the Kingdom of Lesotho, the Republic of Namibia and the Republic of Botswana; References to North America are to the United States, Canada and the Caribbean; References to Latin America are to the countries located on the continent of South America and Mexico; References to Rand, ZAR and R are to South African Rand, the currency of South Africa, and references to SA cents are to South African cents; References to US dollar(s), dollar(s), US$, $ and US cents are to United States dollars and cents, the currency of the United States; References to euro, EUR and are to the currency of those countries in the European Union that form part of the common currency of the euro; References to UK pounds sterling, GBP and are to United Kingdom pounds sterling, the currency of the United Kingdom; References to m 2 are to square meters and references to hectares or ha are to a land area of 10,000 square meters or approximately 2.47 acres; References to tons are to metric tons (approximately 2,204.6 pounds or 1.1 short tons); References to market share are based on sales volumes in a specified geographic region during the fiscal year ended September 28, 2014; References to NBSK are to northern bleached softwood kraft pulp frequently used as a pricing benchmark for pulp; References to market pulp are to pulp produced for sale on the open market, as opposed to pulp produced for own consumption in an integrated mill; References to groundwood or to mechanical are to pulp manufactured using a mechanical process, or, where applicable to paper, made using a high proportion of such pulp; References to woodfree paper are to paper made from chemical pulp, which is pulp made from wood fiber that has been produced in a chemical process; and References to PM are to individual paper machines. Except as otherwise indicated, in this document the amounts of capacity or production capacity of our facilities or machines are based upon our best estimates of production capacity at the date of this document. Actual production by machines may differ from production capacity as a result of products produced, variations in product mix and other factors. Certain market share information and other statements presented herein regarding our position relative to our competitors with respect to the manufacture or distribution of particular products are not based on published statistical data or information obtained from independent third parties, but reflects our best estimates. We have based these estimates on information obtained from our customers, trade and business organizations and associations and other contacts in our industries. Unless otherwise provided in this document, trademarks identified by are registered trademarks of Sappi Limited or our subsidiaries. FORWARD-LOOKING STATEMENTS Except for historical information contained herein, statements contained in this document may constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of

3 The words believe, anticipate, expect, intend, estimate, plan, assume, positioned, will, may, should, risk and other similar expressions, which are predictions of or indicate future events and future trends and which do not relate to historical matters, identify forward-looking statements. In addition, this document includes forward-looking statements relating to our potential exposure to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity price risk. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which are in some cases beyond our control and may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements (and from past results, performance or achievements). Certain factors that may cause such differences include but are not limited to: the highly cyclical nature of the pulp and paper industry (and the factors that contribute to such cyclicality, such as levels of demand, production capacity, production, input costs including raw material, energy and employee costs, and pricing); the impact on our business of adverse changes in global economic conditions; unanticipated production disruptions (including as a result of planned or unexpected power outages); changes in environmental, tax and other laws and regulations; adverse changes in the markets for our products; the emergence of new technologies and changes in consumer trends including increased preferences for digital media; consequences of our leverage, including as a result of adverse changes in credit markets that affect our ability to raise capital when needed; adverse changes in the political situation and economy in the countries in which we operate or the effect of governmental efforts to address present or future economic or social problems; the impact of restructurings, investments, acquisitions, dispositions and other strategic initiatives (including related financing), any delays, unexpected costs or other problems experienced in connection with dispositions or with integrating acquisitions or implementing restructurings or other strategic initiatives, and achieving expected savings and synergies; currency fluctuations. These factors are fully discussed in elsewhere herein. You are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of this document and are not intended to give any assurance as to future results. We undertake no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information or future events or circumstances or otherwise. PRESENTATION OF FINANCIAL INFORMATION With regard to Sappi, unless otherwise specified, all references in this document to a fiscal year and year ended of Sappi Limited refer to a twelve-month financial period. All references in this document to fiscal 2014, fiscal 2013, fiscal 2012, fiscal 2011 or fiscal 2010, or the years ended September 2014, 2013, 2012, 2011 or 2010 refer to Sappi Limited s twelve-month financial periods ended on September 28, 2014, September 29, 2013, September 30, 2012, October 2, 2011 and September 26, 2010, respectively. References to September 2014, September 2013, September 2012, September 2011 or September 2010 represent amounts as at, respectively, September 28, 2014, September 29, 2013, September 30, 2012, October 2, 2011 and September 26, References to the three months ended December 2014 and 2013 refer to the periods from September 29, 2014 to December 28, 2014 and September 30, 2013 to December 29, 2013, respectively. References to December 2014 and December 2013 represent amounts as at, respectively, December 28, 2014 and December 29, Certain numerical figures set out in this document, including financial data presented in millions or thousands, have been subject to rounding adjustments and, as a result, the totals of the data in this document may vary slightly from the actual arithmetic totals of such information. 3

4 CURRENCY OF PRESENTATION AND EXCHANGE RATES We publish our Group annual financial statements and present all financial data in this document in US dollars on a nominal (non-inflation adjusted) basis. The following table sets forth the average and closing exchange rates for the Rand and euro against the US dollar used in the preparation of our financial statements: Average rates Closing rates December December December December Exchange rates ZAR to one US$ EUR to one US$ US$ to one EUR The Bloomberg Composite Rate of the Rand against the US dollar on March 6, 2015 was US$1.00 = ZAR The Bloomberg Composite Rate of the US dollar against the euro on March 6, 2015 was 1.00 = US$ The Bloomberg Composite Rate is a best market calculation. At any point in time, the bid rate is equal to the highest bid rate of all contributing bank indications. The ask rate is set to the lowest ask rate offered by these banks. The Bloomberg Composite Rate is a mid-value rate between the applied highest bid rate and the lowest ask rate. For further information regarding the conversion to US dollars, see note 2 to our Group annual financial statements for the year ended September 2014 and Management s Discussion and Analysis of Financial Condition and Results of Operations Principal Factors Impacting on Group Results Currency Fluctuations. 4

5 RISK FACTORS Risks Related to Our Industry We operate in a cyclical industry, which has in the past resulted in substantial fluctuations in our results. The markets for our pulp and paper products are commodity markets to a significant extent and are affected by changes in industry capacity and output levels and by cyclical changes in the world economy. As a result of periodic supply and demand imbalances in the pulp and paper industry, these markets historically have been highly cyclical, with volatile pulp and paper prices. In recent years, turmoil in the capital and credit markets, coupled with uncertainty created by the European sovereign debt crises, has led to the decreased availability of credit, which continues to have an adverse effect on the world economy and consequently has already affected, and may continue to adversely affect the markets for our products through either a decrease in demand and/or a decrease in achievable selling prices. The timing and magnitude of demand and price increases or decreases in the pulp and paper market have generally varied by region and by type of pulp and paper. A significant increase in the prices for pulp or pulpwood could adversely affect our non-integrated and partially integrated operations if they are unable to raise paper prices sufficiently to offset the effects of increased costs. Other input cost increases including (but not limited to) energy and chemicals may affect our operations if we are unable to raise paper prices sufficiently. The majority of our woodfree paper sales consist of sales to merchants. However, the pricing of products for merchant sales can generally be changed with 30 to 90 days advance notice to the merchant. Sales to converters may be subject to longer notice periods for price changes. Such notice periods generally would not exceed 6 to 12 months. In southern Africa, we have entered into longer-term fixed-price agreements of between 6 to 12 months duration primarily for packaging paper and newsprint sales with domestic customers. Such agreements accounted for approximately 18% of consolidated sales during fiscal Most of our dissolving wood pulp sales contracts are multi-year contracts. The pricing is generally based on a formula linked to the NBSK price as adjusted to reflect market prices for dissolving pulp where there is a divergence. These prices are mostly reset on a quarterly basis. As a result of the short-term duration of paper and dissolving wood pulp pricing arrangements, we are subject to cyclical decreases in market prices for these products, such as that recently affecting dissolving wood pulp prices. A downturn in paper or dissolving wood pulp prices or a prolonged period of depressed market prices for these products could have a material adverse effect on our business, results of operations and financial condition. The markets for pulp and paper products are highly competitive, and some of our competitors have advantages that may adversely affect our ability to compete with them. We compete against a large number of pulp and paper producers located around the world. A trend towards consolidation in the pulp and paper industry has created larger, more focused pulp and paper companies. Some of these companies benefit from greater financial resources or operate mills that produce pulp and paper products at a lower cost than our mills, or are government subsidized. Some of our competitors have advantages over us, including lower raw material, energy and labor costs and fewer environmental and governmental regulations to comply with. As a result, we cannot assure you that each of our mills will remain competitive. Furthermore, we cannot assure you that we will be able to take advantage of consolidation opportunities which may arise, or that any failure to exploit opportunities for growth would not make us less competitive. Increased competition, including as a result of a decrease in import duties in accordance with the terms of free trade agreements, could cause us to lose market share, increase expenditures or reduce pricing, any of which could have a material adverse effect on the results of our operations. In addition, competition may result from our inability to increase the selling prices of our products sufficiently or in time to offset the effects of increased costs which could lead to a loss in market share and aggressive pricing by competitors, and may force us to decrease prices in an attempt to maintain market share. Developments in alternative media and changes in consumer preferences may affect the demand for our products. Consumer preferences may change as a result of the availability of alternative products or services, including less expensive product grades, or as a result of environmental activist pressure from consumers. In addition, trends in advertising, electronic data transmission and storage, mobile devices and the internet could have adverse effects on traditional print media and other paper applications, including our products and those of our customers. Over the last ten 5

6 to fifteen years, the pulp and paper industry has encountered a growing transformation in consumer preferences. During this time, readership and circulation of newspapers and magazines has been declining, accessibility to, and use of, the internet has increased and mobile devices, including digital tablets, have become commonplace. As a result, digital alternatives to many traditional paper applications, including print publishing and advertising and the storage, duplication, transmission and consumption of written information more generally, are now readily available and have begun to adversely affect demand for certain paper products. For example, advertising expenditure has gradually shifted away from the more traditional forms of advertising, such as newspapers, magazines, radio and television, which tend to be more expensive, toward a greater use of electronic and digital forms of advertising on the internet, mobile phones and other electronic devices, which tend to be less expensive. While neither the exact timing nor the extent of these trends can be predicted with certainty, competition from electronic media, for example, has led and may continue to lead to weaker demand for certain of our products, including coated woodfree and mechanical paper historically used in print publishing and advertising, as well as graphic paper more generally. Any such changes in consumer preferences or other trends could negatively impact the consumption of our products and, consequently, could have a material and adverse impact on our results of operations. Global economic conditions could adversely affect our business, results of operations and financial condition. During the latter half of fiscal 2008 and during fiscal 2009, demand for our paper products declined and pulp prices and demand decreased due to the effects of a global economic recession. This recession led to slower economic activity, inflation and deflation concerns, reduced corporate profits, reduced or canceled capital spending, adverse business conditions and liquidity concerns resulting in significant recessionary pressures, increased unemployment and lower business and consumer confidence. Despite the aggressive measures taken by governments and central banks thus far, the economic recovery in certain of our markets remains slow. Certain countries have fallen back into recession and a significant risk remains that the measures taken may not prevent the global economy from falling back into recession. The turmoil in the sovereign debt markets as a result of the European debt crisis further resulted in market uncertainty generally and in worsening economic conditions particularly in Europe. We are still negatively impacted by the slow recovery of various economies in the regions in which we operate, and the results of our European business have been adversely affected by the economic conditions in Europe. Furthermore, we are unable to predict the timing or rate of any recovery. Finally, we cannot predict the timing, duration or effect of any other downturn in the economy that may occur in the future. The availability and cost of insurance cover can vary considerably from year to year as a result of events beyond our control, and this can result in us paying higher premiums and periodically being unable to maintain appropriate levels or types of insurance. The insurance market remains cyclical and catastrophic events can change the state of the insurance market, leading to sudden and unexpected increases in premiums and deductibles and unavailability of coverage due to reasons totally unconnected with our business. In addition, volatility in the global financial markets can adversely affect the insurance market and could result in some of the insurers in our insurance portfolio failing and being unable to pay their share of claims. We have renewed our 2015 asset and business interruption insurance cover at more favorable rates to those of Maximum self-insured retention for any one property damage occurrence is 20.5 million, with an annual aggregate of 33 million. We are unable to predict whether past or future events will result in more or less favorable terms for For property damage and business interruption insurance cost effective cover is not generally available to full value. Since fiscal 2011, our property damage insurance policy has been euro denominated as most of our assets are based in euro denominated jurisdictions. We place the insurance for our plantations on a stand-alone basis into international insurance markets. While the impact of fires on our plantations during fiscal 2012 to 2014 was substantially less than that in fiscal years 2007 through 2010, we are unable to assure you that this will remain so for the foreseeable future. While we believe our insurance policies provide adequate coverage for reasonably foreseeable losses, we are unable to assure you that actual losses will not exceed our insurance coverage or that such excess will not be material. New technologies may affect our ability to compete successfully. We believe that new technologies or novel processes may emerge and that existing technologies may be further developed in the fields in which we operate. These technologies or processes could have an impact on production 6

7 methods or on product quality in these fields. Unexpected rapid changes in employed technologies or the development of novel processes that affect our operations and product range could render the technologies we utilize or the products we produce obsolete or less competitive in the future. Difficulties in assessing new technologies may impede us from implementing them and competitive pressures may force us to implement these new technologies at a substantial cost. Any such development could materially and adversely impact our results of operations. The cost of complying with or addressing liabilities under environmental, health and safety laws may be significant to our business. Our operations are subject to a wide range of environmental, health and safety laws in the various jurisdictions in which we operate. Such laws govern, among other things, water supply, the use of renewable and other fuels, the control of emissions and discharges, the management and disposal of hazardous substances and wastes, the cleanup of contamination, the purchase and use of safety equipment, workplace safety training and the monitoring of workplace hazards. Although we strive to ensure that our facilities comply with all applicable environmental laws and permits required for our operations, we have in the past been, and may in the future be, subject to governmental enforcement actions for failure to comply with environmental requirements. Impacts from historical operations, including the land disposal of waste materials, or our on-going operations may require costly investigation and cleanup. In addition, we could become subject to environmental liabilities resulting from personal injury, property damage or natural resources damage. Expenditures to comply with future environmental requirements and the costs related to any potential environmental liabilities and claims could have a material adverse effect on our business and financial condition. We expect to continue to incur significant expenditures and may face operational constraints to maintain compliance with applicable environmental laws, to upgrade pollution control equipment at our mills and to meet new regulatory requirements, including those related to stricter air emissions standards in the United States, southern Africa and Europe. Risks Related to Our Business Our significant indebtedness may impair our financial and operating flexibility. Our significant level of indebtedness and the terms of our indebtedness could negatively impact our business and liquidity. As of December 2014, on a pro forma basis after giving effect to the Refinancing and entry into the Amended and Restated Revolving Credit Facility, our net interest-bearing debt (long-term and short-term interest-bearing debt plus overdraft, less cash on hand) would have been US$2,119 million. While reduction of our indebtedness is one of our priorities, opportunities to grow within our businesses will continue to be evaluated, and the financing of any future acquisition or capital investment may include the incurrence of additional indebtedness. The level of our debt may have significant consequences for our business, including: limiting our ability to obtain additional financing, which could restrict, among other things, our ability to exploit growth opportunities; diverting a substantial portion of our cash flow from operations to meet debt service obligations; exposing us to increases in interest rates because a portion of our debt bears interest at variable rates; placing us at a competitive disadvantage to certain of our competitors with lower levels of indebtedness; increasing our vulnerability to economic downturns and adverse changes in our business; limiting our ability to withstand competitive pressure; and restricting the activities of certain Group companies under the covenants and conditions contained in certain of our financing arrangements. Our ability to refinance our debt or incur additional debt, the terms of our existing and additional debt and our liquidity could be affected by a number of adverse developments, including as a result of renewed turmoil in the European sovereign debt markets, which could result in tight credit restrictions and credit being available only at premium. 7

8 Since 2006, the Group s credit ratings have been downgraded to sub-investment grade by Standard & Poor s (S&P) and Moody s. Adverse developments in our credit rating and financial markets, including as a result of renewed turmoil in the European sovereign debt markets or deterioration of general economic conditions, may negatively impact our ability to issue additional debt as well as the amount and terms of the debt we are able to issue. Our liquidity will be adversely affected if we must repay all or a portion of our maturing debt from available cash or through use of our existing liquidity facilities. In addition, our results of operations will be adversely impacted to the extent the terms of the debt we are able to issue are less favorable than the terms of the debt being refinanced. We may also need to agree to stricter covenants that place additional restrictions on our business. We are subject to South African exchange controls, which may restrict the transfer of funds directly or indirectly between our subsidiaries or between the parent company and our subsidiaries and can restrict activities of our subsidiaries. See Management s Discussion and Analysis of Financial Condition and Results of Operations South African Exchange Controls. We may also incur tax costs in connection with these transfers of funds. These exchange controls have affected the geographic distribution of our debt. As a result, acquisitions in the United States and Europe were typically financed with indebtedness incurred by companies in those regions. As a consequence, our ability or the ability of any of our subsidiaries to make scheduled payments on debt will depend on financial and operating performance, which will depend on various factors beyond our control, such as prevailing economic and competitive conditions. If we, or any of our subsidiaries, are unable to achieve operating results or otherwise obtain access to funds sufficient to enable us to meet our debt service obligations, we could face substantial liquidity problems. As a result, we might need to delay investments or dispose of material assets or operations. The timing of and the proceeds to be realized from any such disposition would depend upon the circumstances at the time. We require a significant amount of financing to fund our business and our ability to generate sufficient cash depends on many factors, some of which are beyond our control. Our ability to fund our working capital, capital expenditure and research and development requirements, to engage in future acquisitions, to make payments on our debt, to fund post-retirement benefit programs and to pay dividends depends upon our future operating performance. Our principal sources of liquidity are cash generated from operations and availability under our credit facilities and other debt arrangements. Our ability to generate cash depends, to some extent, on general economic, financial, competitive, market, regulatory and other factors, many of which are beyond our control. Our cash flow from operations may be adversely impacted by a downturn in worldwide economic conditions, which would result in a decline in global demand for our products, such as the current decline in demand in Europe, and a softening of prices for some of our products. Our business may not generate sufficient cash flow from operations and additional debt and equity financing may not be available to us in a sufficient amount to enable us to meet our liquidity needs. If our future cash flows from operations and other capital resources are insufficient to fund our liquidity needs, we may be required to obtain additional debt or equity financing, refinance our indebtedness or reduce or delay our capital expenditures and research and development. We may not be able to accomplish these alternatives on a timely basis or on satisfactory terms. The failure to do so could have an adverse effect on our business, results of operations and financial condition. We may not be successful in implementing, or may not realize all the expected benefits from, our strategic initiatives. As part of our overall business strategy, we are implementing strategic initiatives to improve profitability, including high-cost capacity reductions and other cost saving projects, measures to enhance productivity and investment in our higher margin speciality business. For example, we disposed of our Nijmegen Mill in the third quarter of 2014 to reduce capacity and fixed costs in response to declining demand and over-capacity in the European market, and converted Paper Machine 2 at the Alfeld Mill to higher margin speciality paper. Any future growth, cost savings or productivity enhancements that we realize from such efforts may differ materially from our estimates, or we may not be able to successfully implement part or all of our initiatives. The benefit of cost savings or productivity enhancements that we realize may be offset, in whole or in part, by reductions in pricing or volume, or through increases in other expenses, including raw material, energy or personnel, or the demand for our products may decline. With respect to our recent investments in additional dissolving wood pulp capacity, a number of our competitors have also announced additional production capacities, and total announced supply capacity currently significantly outstrips announced demand capacity for dissolving wood pulp, which may adversely affect the price of dissolving wood pulp. We cannot assure you that these initiatives will be completed as anticipated or that the benefits we expect will be achieved on a timely basis or at all. Continued volatility in equity markets and declining yields or defaults in the bond markets could adversely affect the funded status and funding needs of our post-employment defined benefit funds. Several global economic factors currently make the general outlook for the forthcoming fiscal years uncertain. The equity and bond markets (including sovereign debt markets) may remain volatile and move in uncertain and unusual 8

9 ways in the forthcoming fiscal years leading to significant swings in the value of the assets and liabilities of our funded and unfunded defined benefit schemes. Generally, but not always, rising corporate bond yields reduce our net balance sheet liabilities whereas falling bond yields increase our net balance sheet liabilities. There is a risk that equity markets will deteriorate and bond yields will remain low in North America and Europe, which could negatively affect the funded status of our post-employment defined benefit arrangements. In addition, volatility in our net balance sheet liabilities resulting from the relative change in the value of assets and liabilities may be further enhanced by investment strategies resulting in exposure to various classes of assets. Existing and potential changes in statutory minimum requirements may also affect the amount and timing of funding to be paid by us. Most funding requirements consider yields on assets such as government bonds or interbank interest rate swap curves, depending on the basis. Although statutory easements in the pace of funding on these bases have provided some contribution relief to us, as long as yields on these asset classes remain low we expect to have to pay additional contributions to meet onerous minimum funding targets, which could adversely affect our financial position and results of operations. In addition, our pension and post-retirement funds hold various sovereign bonds as part of their fund assets, including Italian index-linked treasuries and sovereign bonds issued by Austria, Belgium, France, Germany, South Africa, the United Kingdom and the United States of America. Any significant decline in value or default of such securities, including in the context of a renewed European sovereign debt crisis, could negatively affect the funded status of our post-employment defined benefit arrangements. Fluctuations in the value of currencies, particularly the Rand and the euro in relation to the US dollar, have in the past had, and could in the future have a significant impact on our results of operations. Exchange rate fluctuations have in the past, and may in the future, affect the competitiveness of our products in relation to the products of pulp and paper companies based in other countries. Fluctuations in the exchange rate between currencies, particularly the Rand and euro in relation to the US dollar, have in the past and could in the future significantly affect our earnings, the competitiveness of our exports, the prices of imported competitors products, and the costs of our raw materials. For example, weaker euro/us dollar exchange rates place pressure on our European business, which purchases approximately half of its pulp requirements from non-local suppliers. Since the adoption of the euro by the European Union on January 1, 1999 (when the euro was trading at approximately US$1.18 per euro), it has fluctuated against the US dollar, reaching a low of approximately US$0.83 per euro in October 2000 before trading at approximately US$1.27, US$1.35 and US$1.29 per euro at the end of fiscal 2014, 2013 and 2012, respectively. At the end of December 2014, the euro was trading at US$1.21 per euro, though its value declined significantly in US dollar terms through January and February On March 6, 2015, it was trading at approximately US$1.08 per euro. The value of the Rand against the US dollar has fluctuated considerably, moving against the US dollar from a low of approximately R13.90 per US dollar in December 2001 to approximately R11.23, R10.09 and R8.31 per US dollar at the end of fiscal 2014, 2013 and 2012, respectively. At the end of December 2014, the Rand was trading at R11.60 per US dollar. The Rand was trading at approximately R12.04 per US dollar on March 6, For further information, see notes 2 and 31 to our Group annual financial statements for the year ended September 2014 and Management s Discussion and Analysis of Financial Condition and Results of Operations Currency Fluctuations. There are risks relating to the countries in which we operate that could adversely affect our business, results of operations and financial condition. We own manufacturing operations in five countries in Europe, two states in the United States and in South Africa and own plantations in South Africa. We also sell our products to customers in over 100 countries world-wide. As a result, our operations are subject to various economic, fiscal, monetary, regulatory, operational and political conditions. Our presence in these countries exposes us to risks such as material changes in laws and regulations, political, financial and social changes and instabilities, exchange controls, risks related to relationships with local partners and potential inconsistencies between commercial practices, regulations and business models in different countries. The occurrence of such events could adversely affect our business, results of operations and financial condition. 9

10 For further information, see Management s Discussion and Analysis of Financial Condition and Results of Operations South African Economic and Political Environment. The inability to recover increasing input costs through increased prices of our products has had, and may continue to have, an adverse impact on our profitability. The selling prices of the majority of the products we manufacture and the purchase prices of many of the raw materials we use generally fluctuate in correlation with global commodity cycles. We have in the past experienced, and may in the future experience, increasing costs of a number of raw materials due to global trends beyond our control. Electricity generation companies are competing for the same raw materials, namely wood and wood chips, in the same markets as us, driving prices upwards, especially during winter in the Northern hemisphere. Although oil prices have decreased from the historical highs of 2008, they could return to high levels in the foreseeable future because of, among other things, political instability in the oil-producing regions of the world. This impacts the oil-based commodities required by our business in the areas of energy (including electricity), transport and chemicals. As has occurred in previous years, a major potential consequence of the increase in the price of input commodities is our inability to counter this effect through increased selling prices, resulting in reduced operating profit and negatively impacting business planning. While we continue to implement procedures to reduce our cost of commodity inputs, the hedging techniques we apply on our raw materials and products are on a small scale and short-term in nature, other than our maintenance of a high level of economic pulp integration. Moreover, in the event of significant increases in the prices of pulp, our nonintegrated and partially integrated operations could be adversely affected if they are unable to raise paper prices by amounts sufficient to maintain margins. If we are unable to obtain energy or raw materials at reasonable prices, or at all, it could adversely affect our operations. We require substantial amounts of oil-based chemicals, fuels and other raw materials for our production activities and to transport our timber and other products. We rely partly upon third parties for our supply of the energy resources and, to a certain extent, timber and pulp, which are consumed in our operations. In addition, our operations are dependent on access to electricity generated by local utilities and power plants, which can at times be unpredictable. For example, Eskom, the state-owned electricity company in South Africa, has recently struggled to meet demand and in some cases has requested that we reduce our demand, leading to temporary shutdowns of certain of our South African production facilities. Eskom has warned that electricity shortages and conditions of intermittent supply could persist for some time. The prices for and availability of these energy supplies and raw materials may be subject to change or curtailment, respectively, due to, among other things, new laws or regulations, imposition of new taxes or tariffs, interruptions in production by suppliers, worldwide price levels and market conditions. Environmental litigation aimed at protecting forests and species habitats as well as regulatory restrictions on cutting or harvesting may in the future cause significant reductions in the amount of timber available for commercial harvest. In addition, future legal challenges and regulations concerning the promotion of forest health and the response to and prevention of wildfires could affect timber supplies in the jurisdictions in which we operate. The availability of harvested timber may further be limited by factors such as fire, insect infestation, disease, ice and wind storms, droughts, floods and other nature and man-made causes, thereby reducing supply and increasing prices. The prices of various sources of energy supplies and raw materials have significantly increased in the past, and may in the future further increase significantly from current levels. An increase in energy and raw material prices could materially adversely affect our results of operations, plantation valuation and financial condition. A limited number of customers account for a significant amount of our revenues. We sell a significant portion of our products to several significant customers, including Antalis, Birla, Igepa, Lenzing, Lindenmeyr, Papyrus and Veritiv. During fiscal 2014 and 2013, no single customer individually represented more than 10% of our total sales. As a significant portion of our sales revenue is generated through sales to a limited number of customers, any adverse development affecting our significant customers or our relationships with such customers could have an adverse effect on our credit risk profile, our business and results of operations. In addition, we rely on credit insurance for our arrangements with certain customers, and the withdrawal or unavailability of such credit insurance may impact our ability to engage with such customers. 10

11 Adverse changes to economic or market conditions could have a negative impact on our significant customers, which in turn could materially adversely affect our results of operations and financial position. Adverse changes in economic conditions have had and may continue to have a negative impact on our significant customers. Such changes cannot be predicted and their impacts may be severe. For example, a disruption in the ability of our significant customers to access sources of liquidity could cause serious disruptions or an overall deterioration of their businesses, which could lead to a significant reduction in their future orders of our products and the inability or failure on their part to meet their payment obligations to us, any of which could have a material adverse effect on our results of operations and financial position. Similarly, sustained adverse changes in market conditions for our significant customers products, such as lower demand or prices or increased competition, could also reduce future orders of our products and have a material adverse effect on our results of operations and financial position. For example, prices for viscose staple fiber, the primary product produced by our dissolving wood pulp customers, dropped over the course of fiscal 2014 due to large reserves of, and declines in the prices for, competitive fibers such as cotton and polyester, for which viscose staple fiber can be used as a substitute. US dollar prices for dissolving wood pulp have experienced sustained pressure as a result. If lower prices and weak margins continue to prevail in the market for viscose staple fiber, our Specialised Cellulose business could be adversely affected. Such adverse changes could also lead to consolidation in the industries in which our significant customers participate, as evidenced by the current trend towards consolidation in the North American print, publishing and distribution industries. Such consolidation could increase our dependence on a few key customers, which could lead to less favorable terms and lower sales prices for our products. Because of the nature of our business and workforce, we may face challenges in the retention of staff and the employment of skilled people that could adversely affect our business. We are facing an aging demographic work profile among our staff due to the mature nature of our industry and the rural and often remote location of our mills, together with generally long tenure of employees at the mills. As a result, we are likely to experience groups of employees leaving the company within a relatively short space of time of one another and may have difficulty attracting qualified replacements. The potential risks we face are a loss of institutional memory, skills, experience and management capabilities. We may be unable to attract and retain sufficient qualified replacements when and where necessary to avoid an adverse impact on our business. A large percentage of our employees are unionized and wage increases or work stoppages by our unionized employees may have a material adverse effect on our business. A large percentage of our employees are represented by labor unions under collective bargaining agreements, which need to be renewed from time to time. In addition, we have in the past and may in the future seek, or be obligated to seek, agreements with our employees regarding workforce reductions, closures and other restructurings. We may not be able to negotiate acceptable new collective bargaining agreements or future restructuring agreements, which could result in labor disputes. Also, we may become subject to material cost increases or additional work rules imposed by agreements with labor unions. This could increase expenses in absolute terms and/or as a percentage of sales. Although we believe we have good relations with our employees, work stoppages or other labor disturbances may occur in the future, which could adversely impact our business. In recent years, certain of our unionized employees in southern Africa have participated in strike actions that have resulted in interruptions in our business operations. Any strike actions or other labor disruptions, or any related negotiations that result in onerous terms for us, may have an adverse effect on our business and profitability. The prevalence of HIV/AIDS, specifically in Africa, exposes us to certain risks which may have an adverse effect on our southern African operations. The southern African region has one of the highest infection rates of HIV/AIDS in the world. Although we initiated in the early 1990s a comprehensive HIV/AIDS management program to address the effects of the disease and its impact on our employees and our business, our operations, and in specific our southern African operations, continue to be exposed to certain risks related to the HIV/AIDS pandemic. We incur and will continue to incur costs related to the prevention, detection and treatment of the disease. Also, we cannot guarantee that any current or future management program will be successful in preventing or reducing the infection rate among our employees and any potential effect thereof on the mortality rate. We may be exposed to lost workers time associated with the disease and a potential loss of skill, which may adversely affect our operations. 11

12 Catastrophic events affecting our plantations, such as fires, may adversely impact our ability to supply our southern African mills with timber from the region. The southern African landscape is prone to, and ecologically adapted to, frequent fires. The risk of uncontrolled fires entering and burning significant areas of plantation is high. In 2007 and 2008, southern Africa experienced a number of abnormal weather events (hot, dry conditions fanned by extremely strong winds), which resulted in disastrous plantation fires across vast areas of eastern South Africa affecting 14,000 hectares of our plantations. These abnormal weather conditions might be more frequent as a result of climate change. In addition, because the transformation of land ownership and management in southern Africa has been moving ownership and management of plantations to independent growers, we have less ability to directly manage fire risk, as well as risks of other catastrophic events, such as pathogen and pest infestations. As a consequence, the risk of plantation fires or other catastrophic events remains high and may be increasing. Continued or increased losses of our wood source could jeopardize our ability to supply our mills with timber from the region. Concerns about the effects of climate change may have an impact on our business. Concerns about global warming and carbon emissions footprints, as well as legal and financial incentives favoring alternative fuels, are leading to the increased use of sustainable, non-fossil fuel sources for electricity generation. The increased emphasis on water footprint in southern Africa is causing increased focus on the use of water by our operational units, on the quality of water released back into natural water systems and on the control of effluent discharges. The costs of our water supply and use also have a direct bearing on our input costs and operating profit. Climate change leading to different weather patterns, such as rainfall and temperature, could also cause the spread of disease and pestilence into our plantations and fiber sources far beyond their traditional geographic spreads, increasing the risk that wood supply necessary to our operations may be negatively impacted. Our ability to utilize our net operating tax loss carry forwards generated by our United States operations could be substantially limited if we experience a Company ownership change as defined under the United States Internal Revenue Code, which may adversely affect our results of operations and financial condition. As a result of the past financial performance of our North American businesses, we have net operating tax loss carry forwards that have been generated by our United States operations. Section 382 of the Internal Revenue Code of 1986, as amended (the Code ), contains rules that limit the ability of a company that undergoes an ownership change, at the Sappi Limited company level, to utilize its net operating tax loss carry forwards in years after the ownership change. An ownership change for purposes of Section 382 of the Code generally refers to any change in ownership of more than 50% of the company s shares over a three-year period. These rules generally operate by focusing on ownership changes among shareholders owning, directly or indirectly, 5% or more of the share capital of a company or any change in ownership arising from a new issuance of the company s shares. If we undergo an ownership change for purposes of Section 382 as a result of future transactions involving our share capital, including purchases or sales of shares between our greater than 5% shareholders, our ability to use our net operating tax loss carry forwards generated by our United States operations would be subject to the limitations of Section 382. Depending on the resulting limitations, a portion of our United States net operating tax loss carry forwards could expire before we would be able to use them. Our inability to utilize our United States net operating tax loss carry forwards could have an adverse effect on our financial condition and results of operations. Our manufacturing and forestry operations are inherently dangerous, and we may be subject to risks related to the health and safety of our employees. We operate a number of manufacturing facilities and conduct various forestry operations, each of which is inherently dangerous. Although we employ safety procedures in the design and operation of our manufacturing facilities and forestry operations, accidents resulting in injury or death have occurred at our facilities in the past and could occur in the future. Any accident could result in injuries, environmental impacts, equipment damage and/or production delays, which could harm our business and our results of operations. The potential liability resulting from any such accident or death, to the extent not covered by insurance, and any negative publicity associated therewith could harm our business, reputation, financial condition or results of operations. Whether or not a claim against us succeeds, its defense may be costly and the existence of any claim may adversely impact our reputation, financial condition or results of operations. Unforeseen shutdowns or disruptions at our production facilities or affecting our information technology systems may adversely impact our business. 12